It can be used to demonstrate the point that any nation's economy reaches its greatest level of efficiency when it produces only what it is best qualified to produce and trades with other nations for the rest of what it needs. The PPF is also referred to as the production possibility curve or the transformation curve.
If production is on the PPF, the country can only produce more of one good if it produces less of some other good. If the economy is producing less than the quantities indicated by the PPF, this is a sign that resources are not being used to their full potential.
In this case, it is possible to increase the production of some goods without cutting production in other areas. The production possibility frontier demonstrates that there are, or should be, limits on production. Each economy must decide what combination of goods and services should be produced in order to attain maximum resource efficiency. In business analysis, the PPF operates under the assumption that the production of one commodity can only increase if the production of the other commodity decreases, due to limited available resources.
Thus, PPF measures the efficiency with which two commodities can be produced simultaneously. This data is of importance to managers seeking to determine the precise mix of goods that most benefits a company's bottom line.
The PPF assumes that technological infrastructure is constant, and underlines the notion that opportunity costs typically arise when an economic organization with limited resources must decide between two products. However, the PPF curve does not apply to companies that produce three or more products vying for the same resource.
The PPF is graphically depicted as an arc, with one commodity represented on the X-axis and the other represented on the Y-axis. Each point on the arc shows the most efficient number of the two commodities that can be produced with available resources. Economists use PPFs to demonstrate that an efficient nation produces what it is most capable of producing and trades with other nations for the rest.
For example, if a non-profit agency provides a mix of textbooks and computers, the PPF may show that it can produce either 40 textbooks and seven computers, or 70 textbooks and three computers. The agency's leadership must determine which item is more urgently needed.
In this example, the opportunity cost of producing an additional 30 textbooks equals four computers. For another example, consider the chart below.
Imagine a national economy that can produce only two things: wine and cotton. For instance, producing five units of wine and five units of cotton point B is just as desirable as producing three units of wine and seven units of cotton.
Point X represents an inefficient use of resources, while point Y represents a goal that the economy simply cannot attain with its present levels of resources. As we can see, in order for this economy to produce more wine, it must give up some of the resources it is currently using to produce cotton point A. If the economy starts producing more cotton represented by points B and C , it would need to divert resources from making wine and, consequently, it will produce less wine than it is producing at point A.
Moreover, by moving production from point A to B, the economy must decrease wine production by a small amount in comparison to the increase in cotton output.
But if the economy moves from point B to C, wine output will be significantly reduced while the increase in cotton will be quite small. Keep in mind that A, B, and C all represent the most efficient allocation of resources for the economy.
The nation must decide how to achieve the PPF and which combination to use. If more wine is in demand, the cost of increasing its output is proportional to the cost of decreasing cotton production. Markets play an important role in telling the economy what the PPF ought to look like.
Consider point X on the figure above. Being at point X means that the country's resources are not being used efficiently or, more specifically, that the country is not producing enough cotton or wine, given the potential of its resources. On the other hand, point Y, as we mentioned above, represents an output level that is currently unattainable by this economy. If there were an improvement in technology while the level of land, labor, and capital remained the same, the time required to pick cotton and grapes would be reduced.
More of both goods cannot be produced with the limited resources. On the chart, that is point F. The production possibility curve bows outward. The highest point on the curve is when you only produce one good, on the y-axis, and zero of the other, on the x-axis. On the chart, that is Point A, where the economy produces , apples and zero oranges. The widest point is when you produce none of the good on the y-axis, producing as much as possible of the good on the x-axis.
On the chart, that is point D: The society produces zero apples and 40, oranges. All the points in between are a trade-off of some combination of the two goods. An economy operates more efficiently by producing that mix.
The reason is that every resource is better suited to producing one good over another. Some land is better suited for apples, while other land is best for oranges. Society does best when it directs the production of each resource toward its specialty. The more specialized the resources, the more bowed-out the production possibility curve. The curve does not tell decision-makers how much of each good the economy should produce; it only tells them how much of each good they must give up if they are to produce more of the other good.
It is up to them to decide where the sweet spot is. In a market economy , the law of demand determines how much of each good to produce. In a command economy , planners decide the most efficient point on the curve.
They are likely to consider how best to use labor so there is full employment. An economy's leaders always want to move the production possibilities curve outward and to the right, and they can only do so with growth. The leaders must create more demand for either or both products. Only after that occurs can more resources be used to produce greater output.
Supply-side economists believe the curve can be shifted to the right by simply adding more resources. However, without demand, they will only succeed in creating underutilized resources. The cookie is used to store the user consent for the cookies in the category "Analytics".
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Analytics Analytics. Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc. Advertisement Advertisement. Since this increase maximum output that we are able to produce it shifts the PPC outward. To achieve our new potential levels of output we also need full employment and productive efficiency.
It could be possible to have this type of economic growth so that we CAN produce the quantities represented by point E, but if there is unemployment and productive inefficiency we would be at a point beneath this new curve maybe point C.
So we may get new resources or new technology so we CAN produce more point E on PP2 , but if we don't use the new resources i. The most commonly used definition of economic growth is simply producing more. When an economy increases its output it is often said to have achieved economic growth. On our graph this would be represented by moving from point D to a point on the curve: A, B, or C.
This means increasing output per person. GDP per capita is calculated by dividing output by the population. This could be caused by war, famine, environmental degradation, and numerous other causes.
How much we can produce in the future depends on WHAT we produce today. Then if we use our resources TODAY to produce more capital manufactured resources , we will have more resources in the future so we will be able to produce more goods and services. Which point on the graph below, A, B, or C, would give this economy the greatest potential most economic growth in the future?
Which point produces the most capital resources? Remember, any point on a graph represents two numbers. Point A represents the more capital goods than the other points, so if we produce at point A we will get more future growth. But this comes at a cost opportunity cost. Japan has been producing a lot of capital good and has achieved much economic growth.
The cost of this growth is fewer consumer goods. The average Japanese income is about the same as that in the US, but they have fewer consumer goods in their homes. We have been producing and consuming many consumer goods, but we have not been adding to our stock of capital resources as quickly as we could.
Which point is "best" for society, A, B or C? By "best" we mean which combination will maximize our satisfaction by achieving allocative efficiency? We discussed allocative efficiency in our 5Es lesson. Many students select point B because it is in-between the other two, but the production possibilities model is not designed to demonstrate allocative efficiency.
Allocative efficiency depends on what the people want. If Americans want more consumer goods and if the Japanese want more economic growth then both points C and A could be allocatively efficient.
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